American Eagle Outfitters Inc.'s
AEO, +1.42%
fiscal second-quarter earnings edged down 3.3% on losses tied to the sale of its children's business, though the teen apparel retailer recorded stronger-than expected sales as it cut down on discounts and saw traffic pick up.

Shares recently rose 4.6% to $21.77 as the company raised its adjusted per-share earnings guidance for the year to $1.33 to $1.36, from its prior view of $1.16 to $1.22. For the current quarter, the company forecast earnings of 37 cents to 38 cents a share, while analysts polled by Thomson Reuters were looking for 37 cents. The stock is up 42% for the year.

Though American Eagle didn't detail specifics on the first three weeks of the current back-to-school quarter, Vice Chairman and Executive Creative Director Roger Markfield said it is dominating the denim category.

"We are really pleased with how our back-to-school season has trended so far," Mr. Markfield said on a conference call.

The company's new fall assortment arrives in stores Friday.

Retailers like American Eagle have been operating in an intensely competitive environment marked by bargain-hunting consumers and deep promotions. The company has been a standout in the teen sector as high-end peer Abercrombie & Fitch Co. (ANF) and bargain player Aeropostale Inc. (ARO) both recently reported weaker fiscal second-quarter amid disappointing same-store sales.

American Eagle's pullback in promotional activity is related to its tighter inventory controls--though the company ended the quarter with inventory at cost per foot up 3%, it is expecting the current quarter to be down in the mid-single digits.

An emphasis on fashion, which represents about 25% of women's merchandise and 15% of men's, has also given a boost to the company as teen retail customers head toward trends and away from basics. American Eagle said it saw strength across its "famous four" categories of denim, shorts, mid tops and color, as well as in dresses, woven shirts and fashion tops.

"We saw a 33% increase in active customers and drove increases in traffic and conversion," Chief Executive Robert Hanson said on the call.

For the quarter ended July 28, American Eagle reported a profit of $19 million, or 9 cents a share, down from $19.7 million, or 10 cents a share, a year earlier. Excluding a loss from discontinued operations tied to the closure of its 77kids business, earnings were 21 cents a share compared with 13 cents. The company recently increased its earnings estimate to 19 cents to 21 cents a share.

American Eagle earlier this month reported net sales increased 11% to $740 million, with same-store sales up 9%, including sales from its online stores.

By brand, American Eagle same-store sales climbed 7%, while aerie increased 13%. AEO Direct, which is composed of ae.com and aerie.com, saw same-store sales rise 28%. Both men's and women's categories increased in the high-single digits.

The company also said it will enter Mexico in the spring of 2013, with plans to open at least four company-owned stores.

It unveiled the plans to exit the 77kids business in May. The brand, which included 22 stores and an online business, had a loss of about $24 million and sales of $40 million in fiscal 2011.

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